Taite Moneybags and his business colleague Aramis Lotsamoney are residents of the UK for tax purposes. They have approached you, as their tax advisor, with some questions about starting a business. They have an interesting business concept involving land development activities. The two plan to set up a parent company, borrow money through the company structure, and loan the money at a commercial rate to a 100% owned subsidiary company. Their initial thoughts are the undertaking will encompass a 2 year planning phase, 5 years of business operation and then the sale of the subsidiary company. During the 5 years of operation the subsidiary will buy and develop land for subdivision and sale.
There are no planned changes in the shareholdings in either company in this 7 year time period. It is planned the subsidiary will pay interest and dividends to the parent company. The business model involves the sale of the subsidiary company by shares to the least competent tender applicant and its subsequent repurchase at a significantly lower price than sale price after 2 – 3 years, refinancing the company’s existing loan if necessary. This plan requires significant initial borrowings with associated expenses including interest.